Burger King: Initiate coverage with a “buy” rating, TP of Rs 210

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Since the unorganized segment has been severely affected by Covid-19, QSRs may realize additional gains due to their better hygiene standards and well-positioned alternative channels, especially delivery.

Burger King India (BURGERKI) is one of the youngest and fastest growing players in the fast food industry (QSR) in India. It focuses on establishing and operating Burger King restaurants across India. The brand is known worldwide for its flagship product Whopper. BURGERKI offers its services through four channels: on-site catering, take-out, delivery and drive-thru. We are initiating a hedge with a “buy” rating and a target price of Rs 210.

Whopper of an opportunity, big change in business model, aggressive expansion: Initiate coverage with “buy”. BURGERKI offers an exciting investment opportunity in the Indian QSR space due to the following factors: India’s large catering industry (FSI) is expected to generate a CAGR of 9% over the next few years, and QSRs are best placed to exploit this opportunity. With their affordability, ambitious branding, greater convenience, advantages of scale and technological advance, QSRs are expected to grow 19% CAGR in fiscal year 20-25E. Since the unorganized segment has been severely affected by Covid-19, QSRs may realize additional gains due to their better hygiene standards and well-positioned alternative channels, especially delivery.

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BURGERKI’s “barbell” product strategy, which emphasizes premiumization at the high end and entry-level value products, places it well to drive SSSG and margin expansion. The introduction of BK Café from 4QFY22 will significantly increase its SSSG and gross margin profile, as seen in the case of McCafé from WLDL. BURGERKI has an ambitious goal of opening 700 stores by December 26, which will expand its network from the current 265 stores, resulting in higher sales growth for its system. We believe BURGERKI’s premium multiples should hold up due to its strong growth profile. Initiate hedging with a buy note and target price of Rs 210 (28x Sep’23 EV / EBITDA). Huge Opportunity in ISF for QSRs with Established Right to Earn Indian ISP is expected to grow by 4.2 trillion rupees ($ 58 billion) at around 9% of CAGR in FY20-25E. Within the FSI, the QSR segment valued at Rs 348 billion ($ 4.7 billion) has recorded the fastest growth but constitutes only 8% of the FSI and 22% of the organized FSI.

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QSRs are expected to increase to 19% CAGR in fiscal year 20-25E. The advantages of QSRs include: a) high price; b) globally known and ambitious brands; c) different cuisines to meet the changing tastes of youth which have been adapted to Indian tastes; d) advantages of scale and better sourcing; e) convenience and prompt service; and f) a technological advantage over peers. Their products have a high volume intensity and lend themselves to rapid delivery. In the post-Covid world, where 30-40% of restaurants are expected to close permanently, QSRs are well positioned to grab shares from other ISP segments, as brand players generate more trust.

Assessment and Advice: We expect all Indian listed QSRs – BURGERKI, WLDL and JUBI – to be significant beneficiaries of the tailwind strengthening (led by Covid-19) in favor of QSR actors. Of these, JUBI will remain the most profitable and efficient player over the next few years. However, Burger King will have an attractive opportunity for revenue and margin expansion. This will be driven by a big change in its business model through the introduction of the barbell product strategy and the BK Café. In addition, aggressive store network expansion and the capped royalty rate will also be key drivers of BPA growth. We expect BURGERKI to achieve a sales CAGR / EBITDA of 71% / 286% in fiscal year 21-23E (on a soft basis) versus 32% / 38% for JUBI. During FY21-26E, BURGERKI’s sales CAGR / EBITDA is expected to be 43% / 110%. We believe BURGERKI’s premium multiples should hold up due to its strong growth profile. Based on a three year perspective, we arrive at a TP of Rs 365 per share (30% CAGR), assuming a multiple of 25x.

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